Microeconomics, Chapter 4: Market Failures Caused by Externalities and Asymmetric Information

Demand

A relationship between the price of a good and the quantity that consumers are willing and able to buy during a given period (otc)

Law of Demand

The quantity of a good during a given period related inversely to its price (otc)

Substitution Effect of a Price Change

When the price of a good falls, consumers substitute that good for other goods, which become relatively more expensive

Money Income

The number of dollars a person receives per period, such as $400 per week

Real Income

Income measured in terms of the goods and services it can buy

Income Effect of a Price Change

A fall in the price of a good increases consumer's real income making consumers more able to purchase goods; for a normal good, the quantity demanded increases

Demand Curve

A curve showing the relation between the price of a good and the quantity demanded during a given period (otc)

Quantity Demanded

The amount demanded at a particular price, as reflected by a point of a given demand curve

Market Demand

Sum of the individual demands of all consumers in the market

Normal Good

A good, such as new clothes, for which demand increases, or shifts rightward, as consumer income rise

Inferior Good

A good, such as used clothes, for which demand decreases, or shifts leftward, as consumer income rise

Movement Along a Demand Curve

A change in quantity demanded resulting from a change in price of the good (otc)

Shift of a Demand Curve

Movement of a demand curve right or left resulting from a change in one of the determinants of demand other than the price of the good

Substitutes

Goods, such as Coke or Pepsi, that are related in such a way that an increase in the price of one shifts the demand for the other rightward

Compliments

Goods, such as milk and cookies, that are related in such a way that an increase in the price of one shifts the demand for the other leftward

Tastes

Consumer preferences; likes and dislikes in consumption; assumed to be constant along a given demand change

Supply

A relationship between the price of a good and the quantity that producers are willing and able to sell during a given period (otc)

Law of Supply

The quantity of a good supplied during a given period is usually directly related to its price (otc)

Supply Curve

A curve showing the relation between the price of a good and the quantity supplied during a given period (otc)

Quantity Supplied

The amount offered for sale at a particular price, as reflected by a point on a given supply curve

Individual Supply

The supply of an individual producer

Market Supply

The sum of individual supplies of all producers in the market

Relevant Resources

Resources used to produce the good in question

Alternative Goods

Other goods that use some or all of the same resources as the good in question

Movement Along the Supply Curve

Change in quantity supplied resulting from a change in the price of the good (otc)

Shift of Supply Curve

Movement of a supply curve left or right resulting from a change in one of the determinants of supply other than the price of the good

Transaction Costs

The costs of time and information required to carry out market exchange (Chicago Board of Trade; agricultural trade)

Surplus

At a given price, the amount by which quantity supplied exceeds quantity demanded; a surplus usually forces the price down

Shortage

At a given price, the amount by which quantity demanded exceeds quantity demanded exceeds quantity supplied; a shortage usually forces the price up

Equilibrium

The condition that exists in the market when the plans of buyers match those of sellers, so quantity demanded equals quantity supplied and the market clears

Disequilibrium

The condition that exists in a market when the plans of buyers do not match those of sellers; a temporary mismatch between quantity supplied and quantity demanded as the market seeks equilibrium

Price Floor

Minimum legal price below which a good or service cannot be sold; to have an impact, a price floor must be set above the equilibrium (so producers don't go bankrupt)

Price Ceiling

A maximum legal price above which a good or service cannot be sold; to have an impact, a price ceiling must be set below the equilibrium price (they don't usually work, justifiable during war times)